SMSF Association worried about LRBA changes

The SMSF Association has voiced its concern over the federal government’s declared intention to capture the use of limited recourse borrowing arrangements (LRBA) within the total superannuation balance and transfer balance caps.

The industry peak body expressed its consternation over the changes due to their complexity and the extremely short time frame for SMSF trustees to make the necessary adjustments to comply with the new measures.

The government has mooted two legislative changes in relation to LRBAs, with one being the inclusion of the outstanding balance of an LRBA in a member’s annual total superannuation balance.

This amendment has been proposed due to concerns over a trustee’s ability to pay a lump sum to a member who could then lend it back to the SMSF, allowing the fund to acquire an asset via an LRBA.

The government feels it would effectively allow members to continue to make contributions by maintaining their net asset balance under the total superannuation balance threshold.

The second proposed change to the legislation is to treat the repayment of the principal and interest of an LRBA from a member’s accumulation account as a transfer balance credit in the member’s account.

Driving this amendment is the government’s disquiet that asset growth experienced in the accumulation phase could be transferred to a member’s retirement phase, while not captured by the transfer balance cap, by paying off what is considered a retirement-phase liability with accumulation-phase income.

“We are currently working to receive greater clarification from government on how these changes are intending to be implemented with a view to minimising negative impacts on SMSF trustees,” the SMSF Association said in an alert to its members.

At the same time, the industry body has asked for member feedback on their concerns and how these could be discussed with Canberra.

It also flagged several other legislative amendments the government is looking to make mainly to do with transition-to-retirement income streams (TRIS). The first of these is a proposal for SMSF members to receive an earnings tax exemption when a TRIS holder has satisfied a nil condition of release.

Other changes the professional body communicated are the government’s intention to further clarify the eligibility of all TRIS products to access capital gains tax relief and its aim to ensure a transfer balance cap debit arises before an income stream is adjudicated to be non-compliant.

A final amendment it told its members the government is looking to make is to the six-month prescribed death benefit rules regarding death benefits and non-retirement spouses to apply from the date on which the relevant bill is amended and not 1 July 2017.

This change will mean spouses who commute death benefits to adhere to the transfer balance cap before 1 July 2017 can cash the amount in excess of the cap as a lump sum without being taxed at marginal rates.